The benefits of holding essential infrastructure in portfolios

Lower correlation with global equities and bonds

Investing in infrastructure as part of a balanced portfolio can provide important diversification benefits because the shares of these companies tend to perform differently to both broader global equities and bonds.

Infrastructure assets are the facilities and structures that countries and their economies need to function and grow. They include sea ports, airports, power stations, pipelines and mobile phone masts.

The importance of these assets means companies often have long-term contracts to operate them, while costs and regulation present high barriers to entry for would-be competitors. As a result, infrastructure companies have the potential to generate stable long-term cash flows that are less sensitive to the economic cycle.

The table below shows that the S&P Global Infrastructure Index has a correlation of only 0.76 with broader global equities and just 0.10 with global bonds. This demonstrates how the asset class can provide useful diversification benefits in a portfolio.

Essential infrastructure provides even greater diversification benefits

While some infrastructure investors include sectors such as construction, shipping and haulage, the managers of the Marlborough Global Essential Infrastructure fund use a tighter definition, which they believe more effectively reaps the full benefits of the asset class.

The fund invests only in companies providing facilities essential for the basic functioning of a society, such as water and gas pipelines, electricity cables and mobile phone towers. These assets are likely to continue to be used regardless of the economic backdrop and the companies that provide them can offer attractive, dependable yields underpinned by strong long-term cash flows.

The table above shows a correlation of only 0.50 between essential infrastructure and global equities, demonstrating that holding essential infrastructure in a portfolio can provide even greater diversification benefits than investing in the broader infrastructure universe.

Investing in essential infrastructure can also provide strong inflation-protection characteristics, because of the nature of the assets involved and the regulation and contracts that exist. Around 95% of the Marlborough Global Essential Infrastructure fund’s portfolio is invested in companies with strong inflation protection.

In addition, investing in a portfolio of essential infrastructure companies can offer a higher degree of downside protection relative to global equities, together with attractive long-term growth potential, which is underpinned by exposure to secular growth trends, such as the transition to renewable energy.

Essential infrastructure can improve portfolio outcomes

Even a relatively small allocation to essential infrastructure has, historically, improved portfolio outcomes. The charts below show how a comparatively modest allocation of 5% to essential infrastructure has delivered a higher total return, lower volatility (standard deviation) and better risk-adjusted performance (Sharpe Ratio) than a traditional 60:40 equity/bond portfolio over 20 years. An allocation of 10% to essential infrastructure provided still greater benefits.

Conclusion

In an unpredictable world, the strong diversification benefits offered by infrastructure and, more specifically, essential infrastructure can play a valuable role in optimising long-term portfolio performance.

The Marlborough Global Essential Infrastructure fund is managed by a highly experienced team who invest in a portfolio of 25-45 high-quality companies providing essential infrastructure facilities around the globe.

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The fund will be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

The Fund invests mainly in the global infrastructure sector therefore investments will be vulnerable to sentiment in that sector. The Fund may therefore be more volatile than more diversified funds. The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of your investment. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or in a timely manner. In extreme market conditions redemptions In the underlying funds or the Fund itself may be deferred or suspended.